14
Alternatives Investors Ignore Fees
Morningstar and other researchers have consistently
found that expense ratios are one of the few data
points predictive of future mutual fund performance,
and investors have increasingly gotten that message,
with greater asset flows going to the cheapest
funds. Yet, when it comes to investing in alternative
mutual funds, it seems that investors forgot to read
the memo.
Over the past three years, alternatives were the lone
broad Morningstar Category where investors seemed
to favor higher-cost funds over lower-cost funds. From
2011
to
2013
, only
36%
of the net
$58
billion that has
flowed into alternative mutual funds has gone to
funds in the cheapest quintile. Across all mutual fund
categories,
121%
of the net
$432
billion of inflows
has gone to funds in the cheapest quintile over the
same time period. The figure is greater than
100%
because as money was coming into cheap funds, it
was leaving more-expensive funds.
Part of the reason for the meager flows into cheap
funds is that investors appear to be performance-
chasing, paying less attention to fees. The perform-
ance-chasing may be exacerbated by the lack of
alternative funds with significant track records.
The recent stampede into Bronze-rated
MainStay
Marketfield
MFLDX
, which has swallowed up one
fourth of the
$58
billion of net inflows since
2011
,
is a good example of money going after good returns.
The
$18
billion fund isn’t cutting investors any
bargains. It has an expense ratio of
1
.
52%
for its Insti-
tutional share class, which falls right in the middle
of similarly distributed alternative funds, despite its
being the group’s largest. The flows have had a big
impact on the average fees investors pay in the cate-
gory. The asset-weighted expense ratio of the long-
short equity category jumped to
1
.
38%
in
2013
from
1
.
24%
in
2012
. The asset-weighted expense ratio in
every other alternative category either fell or stayed
Fund Manager Changes
Fund News
Appleseed APPLX
Impact:
Negative
Date:
06-30-14
Ronald Strauss and Rick Singer retired at the end of June.
|
Our Take: We are maintaining our Morningstar
Analyst Rating of Bronze because three comanagers remain who have been leading the way. Bill Pekin, Adam
Strauss, and Josh Strauss are managers we’ve spoken to over recent years, and we feel comfortable with
them in the lead.
Calamos Market Neutral Income CVSIX
Impact:
Negative
Date:
06-26-14
Lead manager Christopher Hartman has left. Eli Pars was added to the management team in his place.
|
Our
Take: We have lowered this fund’s rating to Neutral from Bronze.
Fidelity Export & Multinational FEXPX
Impact:
Neutral
Date:
07-01-14
Gordon Scott replaced manager Heather Carrillo. Carrillo had run the fund pretty tightly with the S&P 500 Index
and hadn’t impressed in performance.
|
Our Take: We had rated the fund Neutral last year because of Carrillo’s
unimpressive track record. Since March 2011, Scott has been one of a team of comanagers on Fidelity Advisor
Stock Selector Mid Cap FMCAX. Because of the multimanager format, there’s not much to go by for Scott.
FPA Perennial FPPFX
Impact:
Negative
Date:
06-03-14
Steven Geist is retiring from FPA. Comanagers Eric Ende and Greg Herr are dividing his duties.
|
Our Take:
Herr was named comanager in August 2013, so he’s quite new, but Ende has been on board since 1999.
That reassures us that the fund is still in good hands. We have lowered our rating to Silver from Gold to
reflect both the loss of Geist and our confidence in Ende and Herr.
Litman Gregory Masters International MSILX
Impact:
Positive
Date:
08-21-14
James Gendelman has left Marsico Capital, leading Litman Gregory to remove Marsico as a subadvisor and
distribute its portion of the fund among the other five managers: Thornburg, Harris, Northern Cross, Lazard,
and Wellington.
|
Our Take: We’ve had concerns about Marsico for some time, so we welcome the change.
T. Rowe Price Equity Income PRFDX
Impact:
Negative
Date:
10-31-15
Brian Rogers will step down in October 2015 and be replaced by John Linehan, who ran T. Rowe Price Value
TRVLX from 2003 to 2009. From 2009 to the present, he’s served as head of T. Rowe’s U.S. equity team.
|
Our
Take: Linehan has a decent record, but it’s not the equal of Rogers, so we have lowered the fund’s rating to
Bronze from Gold.
Third Avenue International Value TAVIX
Impact:
Negative
Date:
06-30-14
Amit Wadhwaney left. Matthew Fine, who has comanaged the fund since 2012 and had been an analyst on
the fund since 2003, took over as the lead manager. Wadhwaney’s exit comes in the wake of other departures
from the international team. In April 2013, Jakub Rehor, who had been a long-tenured analyst and named to
the fund’s portfolio-management team in January 2013, left the firm.
|
Our Take: Wadhwaney and the analysts’
departures are a big blow, and we’ve downgraded the fund to Neutral.
Third Avenue Value TAVFX
Impact:
Negative
Date:
06-10-14
Robert Rewey III has replaced Ian Lapey. Rewey comes to Third Avenue from Cramer Rosenthal McGlynn. He
was one of several comanagers, so he doesn’t have much of a track record.
|
Our Take: We have lowered the
fund’s rating to Neutral from Bronze because of Rewey’s record and because there seems to be a steady
exodus from the firm.
